Determinants of capital structure of banks in Kenya: an empirical approach

Abstract

Given the central role of market and credit risk in their core business, the success of banks depend on their ability to identify, assess, monitor and manage these risks in a sound and sophisticated way. In order to assess and manage risks, banks must have effective ways of determining the appropriate amount of capital that is necessary to absorb unexpected losses arising from their market, credit and operational risk exposures. The objective of this study was to find out the determinants of capital structure of commercial banks in Kenya. The study used inferential research design. The population of this study was all the 43 commercial banks in Kenya. Secondary data was drawn from the financial statements of commercial banks. The data was analysed using descriptive analysis and multiple regression analysis. The study found that overall leverage of banks is negatively related to operating assets. The study also found that long-term debt structure is positively and statistically related to operating assets. The result also shows that short-term debt of banks is negatively related to banks’ profitability, risk and asset structure and positively related to bank size, growth and corporate tax. On the other hand, the long-term debt of the banks is positively related to banks’ asset structure and profitability and inversely related to bank risk, growth, size and corporate tax. In conclusion, the empirical evidence from this study suggests that profitability, corporate tax, growth, asset structure and bank size are important variables that influence banks’ capital structure. However, there is no support of banks’ risk influencing the level of leverage of banks in Kenya. This finding is contrary to earlier studies. The study recommends that commercial banks in Kenya need to remain profitable in order to rely less on external debt as a source of financing. Policies also need to be directed at improving the information environment.